An international agreement to help Ukraine fund its logistically crucial natural gas business is encouraging but probably insufficient as protection against further interruptions of Russian gas deliveries to Europe. Given the agreement's tangled context, encouraging may have to be enough for now.
The European Commission on July 31 reported a package of loans worth as much as $1.7 billion to help Ukraine buy, store, and move gas. The loans would come from the European Bank for Reconstruction and Development, World Bank, and European Investment Bank. EC Pres. Jose Manuel Barroso said the agreement "should provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia and therefore provide the security of supply that member states and our consumers expect."
Disrupted shipments
The crisis to which Barroso referred is the repeated disruption to pipeline shipments of Russian gas to Europe during pricing disputes involving Ukraine, across which most westbound gas from Russia must pass. The latest showdown came in June, when Russian Prime Minister Vladimir Putin threatened to suspend deliveries unless Ukraine paid for gas bought for underground storage in May. Although the Ukrainian state oil and gas company, Naftogaz, made the payment to the Russian seller, Gazprom, no one, especially in Europe, considers the problem solved.
The Europeans are losing confidence in Ukraine, where the physical gas system is shaky and the gas business, shady. Their concerns legitimately extend beyond the country's financial ability to meet its obligations to Russia, questionable as that is. The loan package, therefore, comes with a stern set of conditions. Only $300 million of the prospective loans is for gas purchases. The rest is for rehabilitation or expansion of the physical system. The agreement also requires business reform, including segregation of the Naftogaz transmission unit from domestic operations and open access to services.
These are important and necessary steps. But the agreement hardly addresses all problems, beginning with the immediate one: money. The loan total falls well short of the $4.2 billion Ukraine earlier this year said it needs. And the package won't soothe the destabilizing rivalry between President Viktor Yushchenko and Prime Minister Yulia Timoshenko.
Nor will it sweeten the bitter relations between Ukraine and Russia. After the EC's announcement of the funding agreement, in fact, Moscow circulated word that it would not be making a $5 billion loan of its own to Ukraine, which had been under discussion since a request by Tymoshenko in February. The Russian loan was said to be contingent on the availability of funding from Europe, but Russian officials now are reported to be saying it isn't needed.
To a Russian government openly disdainful of the western-leaning Yushchenko, who is seeking reelection in a vote scheduled for January, Gazprom is a useful lever. But Gazprom has its own problems, including the $1.1 billion worth of sales it didn't book during a 20-day suspension of gas shipments through Ukraine last January. With revenue under assault from shrinking sales volumes and falling prices, the company's ability to fund major capital projects has weakened (OGJ, Aug. 3, 2009, p. 25). Among its ambitions are two gas pipelines that would connect Russia directly to Europe, lowering though not eliminating the importance of Ukranian transit.
But a rival project, the Nabucco pipeline to carry Caspian-area gas to Europe without crossing Russia, took an important step last month with the signing of an authorization agreement by the European Union and Turkey. To Gazprom, the agreement cannot have come as welcome news.
Slight comfort
Gas market developments give Europe slight comfort. European gas consumption is down, and LNG backed out of oversupplied Pacific markets is available at distress prices. But those conditions will change when economies recover.
Few Europeans need reminding that, no matter what happens in the gas market or which new westbound pipelines materialize, reliability of Russian gas supply remains crucial. And reliability of Russian gas supply will continue to depend on pipelines crossing a financially struggling country subject to strong pressures within, along, and far beyond its borders.
